Outlook of the Week – Milltrust India Fund

Outlook of the Week – Milltrust India Fund

V. Srivatsa, Portfolio Manager for the Milltrust India (UCITS) Fund, and Fund Manager at UTI, shares his outlook for the Indian markets and the key reasons to be invested in India:

Growth recovery has begun. The underlying growth has been mediocre in the last few years led by confluence of factors such as two consecutive monsoon failures, lack of government spending, weak global economy, elevated stress levels in key sectors of power, infrastructure which meant limited private sector capex and also poor consumer spending in general. Given the base in the last few years coupled with the fact that we have seen indications of a change in government spending and the bottoming out of private sector capex, a growth recovery has begun and likely to continue in the short to medium term.

Key growth drivers in the medium to long term include:

Normal monsoon. After two consecutive failures, a normal monsoon which is expected should increase the rural income in the near future.

Increase in capex. Government is in position to kick start the infra capex after three years of lull as there has been decent savings on oil and fertilizer subsidies

Key reforms. Government has initiated various reforms in the last couple of year such as Make in India, digitization of government services which are designed to improve business sentiment and also ensuring there are less leakages in the transfer or subsidies to the final public. These will ensure both improvement in the private sector capex and increasing the wallet of the consumers.

Increase in consumer spending. We also expect the consumer spending to pick as we see the full benefits of the seventh pay commission which is the salary increments for the government servants coming into force and the savings from fuel which would increase the consumer wallet.

Specific reasons for being invested in these markets

Amongst the emerging markets, India offers very high political stability, high quality of corporations, as well as a consumption-driven economy which differs from Russia or Brazil which are more commodity driven.

India also scores high on soft parameters such as market liquidity, high quality of corporate governance and offers a balanced representation of the markets which is not overtly dependant on one sector for survival.

Our macroeconomic quality parameters are very good such as fiscal deficit is likely to be in below 5% of GDP, our current account deficit will be less than 1% in FY 16, inflation is well contained at around 5-6% band and all this has resulted in stable interest rate and currency.

We expect double digit earnings growth after three years of lull as we see demand growth picking up coupled with full benefits of the fall in the commodity prices and lower leverage and low base effect.

Valuations are on slightly above normal at around 17-18 x, but it has remained at higher levels than this during time of strong earnings growth.

Key Risk factors

This remains the biggest risk as globally risk assets have rallied in the last few months led by benign central bank action in Japan and EU and signs of china bottoming out. We have also not seen the benefits of the QE in Europe in terms of demand picking up inspite of the best efforts by the ECB . India being a part of the riskier EM basket is vulnerable to this.

Hopes are pinned on normal monsoons in the coming year and any shortfall here would lead to disappointment in the markets.

Higher commodity prices. The commodity prices have been soft in the last year and Indian economy needs stable prices to delivery. Any sharp increase in the commodity prices especially crude will lead to stress in fiscal deficits and higher inflation and would also have impact on corporate profitability.

Exchange related. While India has managed well in the last three years, INR remains vulnerable to any global event impacting emerging market currencies.

Failure of Reforms. Markets would expect good progress on reforms and also introduction of new reforms. Any negative development would lead to poor business sentiments impacting investments.

Our portfolio is well diversified and we are not overtly exposed to any one factor. our portfolio is fairly liquid and has good proportion of large caps thus in case of sell down we would be impacted less , while we have stocks which could impacted by any of the factors such as poor monsoon , reforms failure or higher commodity prices , their proposition is not very high which can cause significant damage to the fund.

Forecasted return for each investment over the next 12 months (in USD). Given the forecasts of above normal monsoon and passing of various legislation bills, there remains hope of a double digit growth in earnings for next year which has eluded us for the last three years.

Potential downside over the next 12 months (in USD).We expect potential downside to come from any global sell off, this is difficult to quantify given this is a liquidity driven event, there could be five percent downside to the markets in the near term.